We expect a rate cut from the Swiss National Bank

We expect a rate cut from the Swiss National Bank
We expect a rate cut from the Swiss National Bank

While the majority of central banks around the world are focused on fighting inflation, the SNB faces the opposite challenge: a low inflation outlook.

Recent inflation stood at 1.4% year-on-year, which is higher than the recent inflation forecast of 1%. This could suggest keeping rates unchanged at the next central bank meeting. However, 43% of inflation is explained by rising rental prices, in a context where landlords are only allowed to significantly increase rents if mortgage rates increase. Since the interest rate curve is significantly lower than last year, inflation from rising rental prices will disappear from the year-on-year Consumer Price Index (CPI) figures at the future. Thus, by removing rent inflation from the recent CPI, inflation of 1.4% is reduced to around 0.8%, suggesting an easing of monetary policy.

Regarding the Swiss franc, the European Central Bank (ECB) wants to lower interest rates, which will reduce the rate differential between the ECB and the SNB. This will put upward pressure on the Swiss franc, which is disinflationary. The SNB has limited room to reduce interest rates, as the policy rate is currently only 1.5% and the central bank is reluctant to return to a negative interest rate environment and/or or to increase its balance sheet. Therefore, the most effective course of action is to take the lead in reducing interest rates and easing monetary conditions, which will likely lead to a devaluation of the Swiss franc.

Finally, according to recent economic data, the Swiss economy is slowing down: the manufacturing and services PMI indices showed weak figures and the GDP, at +0.6%, is below the trend growth of 1. 5%. The SNB also considers the current monetary policy to be restrictive, as shown by the recent speech that Thomas Jordan, President of the SNB, gave in South Korea, where he emphasized that the R* (the neutral real interest rate which balances the economy in the long run) is equal to zero. Thus, a reduction in interest rates would support economic activity, while the risk of overheating of the Swiss economy would be punitive.

Overall, low inflation (excluding rent), upward pressure on currencies, weak economic activity and restrictive monetary policy will likely lead the SNB to cut rates by 25 basis points on June 20 .

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